Thailand: Growth forecasts up

Set to enjoy another year of strong growth in 2013, Thailand’s economy is benefitting from the wider region’s rapid expansion and inflows of foreign capital. New investment will concentrate on upgrades to transport infrastructure, which will help further improve trade relations with its neighbours.

On April 15, the World Bank published its latest report on the East Asia and Pacific region, revising upward its GDP growth estimates for Thailand. The economy is expected to expand by 5.3% in 2013, up from an earlier projection of 5%. Similarly, the figure for 2014 was raised from 4.5% to 5%.

Thailand is the sixth-largest economy in the region, benefitting from strong ties with many of its East Asian neighbours: Japan has long been a major source of foreign investment and trade, although recent reports in the Chinese press suggest that the Asian giant may overtake Japan as Thailand’s largest individual trading partner within three years. Efforts are also ongoing to encourage the lowering of trade barriers within ASEAN, which should allow the country to capitalise on the growth of its neighbours, such as Vietnam, Malaysia and Indonesia.

Domestic demand, and to an extent exports to other Asian countries, have helped Thailand ride out the blustery global economic conditions of recent years, which have particularly affected the eurozone, the country’s largest trading partner, and the US, which ranks fourth after the EU, Japan and China.

Sluggish growth and a low interest rate environment in Europe and North America have seen strong capital flows to Asia over the past year, as investors seek higher returns. The World Bank has warned that Asian countries must be wary of hot money, in part because it can depart as swiftly as it arrived. Short-term capital inflows also create the risk of asset bubbles.

Gross capital flows to the region totalled $46.8bn in the first three months of 2013, up 86.3% on the same period in 2012; this has contributed to Thai stocks rising by 48% in just 14 months. Investors have also shown a particular appetite for Thai bonds, with one recent issue three times oversubscribed.

According to the Bank of Thailand (BoT), the central bank, more than 15% of government debt is now held by foreign investors. Enthusiasm for Thai assets is of course a vote of confidence in the country’s economic future and provides welcome capital for development, but the BoT is aware of the downside risks.

On April 22, the central bank admitted that it was concerned by the rise in the value of the baht and said it was ready to act if the appreciation continued “way beyond” fundamentals. However, the BoT is unlikely to cut what are already fairly low interest rates to forestall further gains, which could have the counterproductive result of encouraging overheating domestically. Furthermore, officials point out that the rise in the baht is due both to Thailand’s strong macroeconomic base, and its transition from a low-income, low-cost economy to a more value-added model.

During a press briefing in April, Anoop Singh, the director of the Asia and Pacific Department at the IMF, said that he did not feel that the high value of the baht was eroding competitiveness or growth.

“If we look at Thailand specifically, we have seen that growth has picked up,” he said. “Growth was about 6% in 2012; it should remain close to 6% for this year. From all accounts, exports remain competitive and export growth has been strong. So, overall I think what we are seeing in Thailand and Asia is part of the process of the implications of rebalancing and the effects on exchange rates.”

As foreign cash flows into the region, the World Bank has urged countries to channel investment into infrastructure and human capital to enhance competitiveness and productivity with the aim of underpinning long-term growth. In January, the local press reported that the Thai government is preparing 55 transportation projects worth BT2.27trn ($78.74bn) to be implemented by 2020, with BT100bn ($3.47bn) allocated in the 2013 fiscal year.

The aim of these investments is to strengthen Thailand’s position as a transportation centre at the heart of ASEAN, improving its rail, road and air links to the rest of the region and beyond, including to China. Almost two-thirds of the money is likely to go toward railways, enhancing Thailand’s export potential, lowering long-distance transportation costs and reducing carbon emissions.